MONEY & THE LAW: Real estate brokers can be sued, but winning is another matter

By: Jim Flynn

September 22, 2013Updated: September 22, 2013 at 9:50 am

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The Colorado Supreme Court confirmed in Gibbons v. Ludlow that real estate brokers can be sued for malpractice. But the court's opinion made clear that a successful malpractice action against a real estate broker is a hard row to hoe.

In Gibbons, the plaintiffs (sellers) wanted to sell 131 acres of undeveloped land in Boulder County. In 2000, they listed the property with the defendants (brokers). The sellers rejected several offers over the next seven years.

Finally, in 2007, a buyer proposed an acceptable selling price for 49.2 acres, but only if the property was in developed condition, meaning the installation of utilities, roads, drainage facilities and the like.

And, tucked away in the contract was a provision that the buyer would, at closing, receive a credit against the purchase price for the cost of this development work if the sellers had not performed the work prior to closing.

Well, by closing, the work had not been done, and the credit turned out to be $1. 6 million - nearly 25 percent of the $6.5 million purchase price. By then, the transaction was a legal obligation. The sellers, however, immediately took the position that the brokers had breached a professional duty.

The sellers said the brokers' negligence caused them to sell their property for far less than it was worth and sued to make up the difference.

Although the brokers could have argued about liability, they instead asked for dismissal on the premise that no damage could be proven.

The trial court judge agreed and dismissed the case. The Colorado Court of Appeals disagreed and reinstated the case. The Supreme Court, with three justices dissenting, sided with the trial court judge and ordered the case dismissed.

The buyer testified in a deposition that the property wasn't worth $6.5 million and, but for the $1.6 million credit, he never would have purchased the property. The sellers, for their part, couldn't prove anyone willing to pay more was waiting in the wings.

The specific ruling of the Supreme Court said a real estate malpractice claim must show that, but for the alleged negligent acts of the broker, the plaintiff either "(1) would have been able to obtain a better deal in the underlying transaction: or (2) would have been better off by walking away from the underlying transaction." In this case, the sellers could show neither.

As a real estate broker I know regularly point out, sellers always think their property is worth more than buyers are willing to pay. She then usually adds: "And people in hell want ice water."